A shipping company can buy either a new truck or a used truck.Each truck will generate $4,000 in net revenue per year.But the new truck has a useful life of three years,whereas the used truck has a useful life of only two years.If the interest rate is 5 percent (0.05)per year,what is the difference in value between the two trucks? (Assume that each year's revenue is received at the end of the year. )

Question

Quizplus · Accepted Answer

To find the difference in value between the two trucks, we need to calculate the present value of the net revenue generated by each truck.

For the new truck,
PV = $4,000 + $4,000/(1 + 0.05) + $4,000/(1 + 0.05)^2
PV = $11,620.25

For the used truck,
PV = $4,000 + $4,000/(1 + 0.05)
PV = $8,532.90

The difference in value between the two trucks is:
$11,620.25 - $8,532.90 = $3,087.35

Therefore, the best choice is to buy the new truck as it has a higher present value of net revenue.

A Shipping Company Can Buy Either a New Truck or a Used